According to a US census carried out in 2019, approximately 98,969 people living in the US registered their place of birth as being in Australia[1]. This is the second highest Australian diaspora after the United Kingdom[2]. Most will either remain in the US permanently or return to Australia, but many are uncertain as to which one it will be. In this article, we look at some of the investment and tax considerations for each of these scenarios.

Australian’s that plan to remain in the US

The planning involving US accounts is unlikely to be too different to that of someone that was born in the US and has no intention of moving abroad. One consideration that might still apply is how to manage your US accounts when you also have accounts in Australia. If you already have a large exposure to the US market through your US accounts, do you want to be holding a large exposure to the US market in your Australian account as well. Not only could this reduce diversification, but it might also create currency inefficiencies.

If you do hold assets in Australia, the need for cross-border planning is likely to be more significant on the Australian side. Two of the most common issues relate to holding a Superannuation fund and Passive Foreign Investment Companies (PFIC’s). In these instances, speaking with a cross-border tax specialist can help to ensure the financial planning is tax efficient for a US resident.

Broadly speaking, for Australians that are considered US taxpayers, Australian superannuation is likely to be considered as taxable and reportable in the US (subject to the availability of US foreign tax credits). Therefore, contributions to Australian superannuation are not recommended while US tax resident.

Further, as a US taxpayer, holding Australian mutual funds or ETFs are considered PFIC’s by the IRS. This means that the unrealized gains may be taxable in the US and each PFIC is required to be reported on Form 8621.

Australian’s that plan to return to Australia

In this scenario, utilizing a taxable investment account may present one of the best opportunities if the correct investment strategy is used. If you invest in a taxable account and hold it until you become an Australian tax resident, you may receive an uplift of the cost basis for Australian capital gains tax purposes, based on the value when you return to Australia. Therefore, only the gains on the investments after returning to Australia may be taxable. However, if you are a US Green Card holder or US citizen, the gains will still be taxable in the US with a tax credit for the Australian tax paid. Having the right investment strategy in place is important for the tax planning to work.

While there is potentially a benefit to holding the investment outside of a retirement account, it should not be automatically assumed that this is the best option. Many people will receive contributions from their employer into their US retirement account, and tax relief on their own personal contributions, so avoiding these accounts will result in missing out on this money. Other accounts with tax benefits such as college savings plans or Health Savings Accounts should be carefully considered if you do not intend to use them before you leave the US. Broadly speaking, a college savings plan or HSA will be taxed in Australia based on the growth of the funds. Therefore, a multiyear withdrawal approach may be considered.

For Australians that return home and are not US Green Card holders or US citizens, they should consider the availability of their bring forward concessional super contributions cap which generally can bring forward the annual cap by up to 5 years.

The undecided

Moving somewhere new with an open mind to seeing what will happen can be a good way to approach such a life changing event, but it can make planning a little bit trickier. Even those that move with the intent to definitely stay or definitely return, can often end up changing their mind, which probably makes this last group of people the largest. The good news is that with the right type of planning it need not be an issue.

The focus so far has been on the more common vehicles such as taxable accounts and retirement accounts. A much wider range of accounts and investments may be needed in a financial plan, and some such as trusts and real estate are often included. However, for this final category we shall stick with the two that we have focused on so far.

In this final scenario, the strategy is closer to that of someone remaining in the US than someone intending to return. The reason for this is that if you plan effectively, you will probably miss out on more benefits if you plan to return and end up staying, than visa-versa. To straddle the two a combination of both taxable accounts and retirement accounts is likely to work well. You do not have the age restrictions with a taxable account that you do with a retirement account. Furthermore, with the right investment and tax strategy, it can be a tax efficient option if you return to Australia. On the other hand, the retirement account could help reduce your current income tax rate and offer tax deferred growth for the investments. The Australian tax treatment for retirement accounts is different if you do end up returning to Australia, so planning with an international tax specialist should be considered. You should also think very carefully about what retirement account you contribute to. The tax reasoning for using a Roth, for example, may be lost if you return to Australia.

Even though most Australians living in the US will fall into one of these categories, there is the fourth category, which includes those who intend to move to a completely different country. If you have built up accounts in the US then you should consider how these fit into your global financial plan, and whether you retain or lose your US tax filing obligation will have a big impact on this. If you plan to join Australia’s largest expatriate population in the UK, our article on non-UK reporting funds looks at one of the common issues that people encounter.

Although the US tax code can be tricky to navigate for globally mobile individuals and families, it can also present opportunities for US/Australian cross border planning. Cross Border Financial Planning USA specializes in creating flexible financial plans, and work closely with international specialists to optimize the tax efficiency. If you would like to find out more about how we can help, please email Edward Cole at ecole@cbfpusa.com.

Cross Border Financial Planning USA LLC is an investment adviser located and registered in Pennsylvania.  Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the State of Pennsylvania.  Cross Border Financial Planning USA LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration.  A copy of Cross Border Financial Planning USA LLC’s current written disclosure brochure which discusses among other things, Cross Border Financial Planning USA LLC’s business practices, services, and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.

[1] https://data.census.gov/cedsci/table?t=Place%20of%20Birth&tid=ACSDT1Y2019.B05006&hidePreview=false

[2]https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/datasets/populationoftheunitedkingdombycountryofbirthandnationality